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By Marilyn Serafini, Randy Barrett, Tarbell

When you step up to the pharmacy counter to get your prescription, a deal has already been struck behind the scenes between two major players in the supply chain: drug makers and pharmacy benefit managers, like CVS Caremark.

Your financial wellbeing is not the first priority in this arrangement, say critics. That's because both PBMs and drug makers stand to benefit when a medicine price is high.

PBMs negotiate discounts with manufacturers on behalf of insurance carriers and businesses, trade unions and school systems that provide health care benefits to employees. Aside from CVS Caremark, the largest are Express Scripts and UnitedHealth Group's OptumRx.

"What goes on now is, frankly, a bit of a game," said Health and Human Services Secretary Alex Azar on May 11 when the White House announced its plan to address high medicine prices. "The drug company negotiates this 30 percent rebate. And then the next day, increases the [medicine's] price by 30 percent."

(Meanwhile, your co-pay may be based on the higher original price, which comes before discounts are factored in -- but more on that later.)

The two are "taking advantage of a capitalist system," said Tim Thomas, a Colorado consultant who advises self-insured employers about rebate contracts with PBMs. Thomas owns Crystal Clear Rx and says that PBMs are "demanding bigger rebates, so pharmaceutical companies have to raise prices to pay for them." Thomas has worked as a pharmacist, run his own PBM and worked for one of the big players, HealthTrans.

Finger Pointing

The PBM industry denies the connection and points the finger of blame at drug makers. In a 2017 industry-funded study, the Pharmaceutical Care Management Association asserted that "drug makers raise prices even when rebates are low in major drug categories." That includes medicines for multiple sclerosis, rheumatoid arthritis and anticonvulsants.

Drug makers, long pegged as the bad guy in high drug costs, are working hard to redirect the focus to PBMs. In recent radio ads, PhRMA claims that more than one-third of the list price of a medicine goes into rebates to middlemen, "like insurers and pharmacy benefit managers."

At an October 2017 hearing of the Senate Health Education Labor and Pensions Committee, Lori Reilly, executive vice president, policy, research & membership at PhRMA, said that PBMs "secured over $100 billion in 2015 rebates and discounts [but that] unfortunately what's happening today is that they're often not making their way back to patients at the point of sale."

That assertion was countered by PCMA president Mark Merritt, who implicated drug makers and denied that PBMs are at fault. "Mylan didn't raise EpiPen prices by 400 percent because of the supply chain," he said, attributing increases instead to supply and demand.

It's a "circular firing squad," said Craig Oberg, managing consultant at The Burchfield Group. Oberg is a consultant who advises self-insured employers on contracts with PBMs. As he sees it, his job is to keep PBMs from hiding discounts and rebates from the employers.

Critics say the way the supply chain has developed--and its opacity--benefits the drug industry because the fault for high prices can be more easily assigned elsewhere. "The manufacturers have fogged up the issue by pointing to PBMs," says John Rother, president and CEO of the National Coalition on Health Care, which spearheads the Campaign for Sustainable Rx Pricing. "The real problem is pricing. The whole system needs to be cleaned up and made more transparent."

The drug industry trade group PhRMA did not respond to Tarbell's requests for comment for this story.

It's clear that prescription drug prices and rebates are going up. Prices for drugs currently on the market increased an average of nearly 10 percent annually over the last several years, according to a Commonwealth Fund study conducted by former Democratic Rep. Henry Waxman. Concurrently, rebates are also increasing. In the Medicare prescription drug program, Part D, rebates now account for 23.8 percent of total drug spending, which is up significantly from 8.6 percent when the program started a decade ago, according to a Kaiser Family Foundation report based on the 2017 Medicare trustees report.

Maximum Leverage

The PBMs' leverage comes from their power to create preferred drug lists, called formularies. The PBM decides which drugs an insurance plan will cover. Because there are often multiple medicines that can accomplish the same goal, sometimes competing drugs are excluded from a formulary altogether.

Because manufacturers want their drugs included, there's an incentive for them to offer PBMs large rebates. PBMs often make formulary decisions based on the products that are generating the most rebates, and "that may or may not be the best choice for the payer or the patient," says Thomas.

Employers and health plans, meanwhile, want all of the rebates and discounts to pass through the PBM and come to them, but the fog surrounding the process makes no guarantees. The PBM passes some of the rebates directly through to them, and experts say lower premiums for consumers have resulted. Still, PBMs keep an undisclosed chunk of the rebates, discounts and fees.

Maximum Leverage

The PBMs' leverage comes from their power to create preferred drug lists, called formularies. The PBM decides which drugs an insurance plan will cover. Because there are often multiple medicines that can accomplish the same goal, sometimes competing drugs are excluded from a formulary altogether.

Because manufacturers want their drugs included, there's an incentive for them to offer PBMs large rebates. PBMs often make formulary decisions based on the products that are generating the most rebates, and "that may or may not be the best choice for the payer or the patient," says Thomas.

Employers and health plans, meanwhile, want all of the rebates and discounts to pass through the PBM and come to them, but the fog surrounding the process makes no guarantees. The PBM passes some of the rebates directly through to them, and experts say lower premiums for consumers have resulted. Still, PBMs keep an undisclosed chunk of the rebates, discounts and fees.

The Centers for Medicare & Medicaid Services (CMS) is able to clear the haze a little because it requires reporting of rebate numbers, and of other additional compensation that come after the point of sale, neither of which the consumer benefits from. It's like going to shop at Macy's the day before the sale.

"Part D sponsors and PBMs are engaging to a greater extent in arrangements that feature compensation, [such as rebates, which come] after the point of sale, and the value of such compensation is also generally increasing," according to 2017 CMS calculations.

That means more rebate dollars to bring down overall prescription drug costs in Medicare, and some of that money also helps lower premiums for beneficiaries. However, the negotiated rebates don't apply to the patient's out-of-pocket costs, so any deductibles, co-payments and cost-sharing are based on retail prices before these discounts.